One significant part of President Barack Obama's program to avert foreclosures is in danger of being disapproved by Congress after several Democrats expressed their concerns. This refers to Obama's proposal to give judges the authority to order mortgage lenders to modify the loans of troubled homeowners filing for personal bankruptcy.



The House rescheduled the voting on the proposal as Democrats can not find strong support for the proposal even within their party. The proposal is also expected to get strong opposition in the Senate, as many prominent Republicans are opposed to the proposal.

The proposal would enable judges to revise the terms of a mortgage loan to make it more affordable to borrowers, helping them avoid foreclosures. The one thing mortgage lenders fiercely oppose is the provision that judges would be able to lower the loan principal to as low as the home's market value.

John Dalton, chief of the Housing Policy Council, also argued against the proposal saying the legislation will make the mortgage and housing markets riskier for investors at a time when more investors are needed to rejuvenate the markets.

Democratic Representative Brad Miller defended the proposal by saying that it is the only way available to force mortgage lenders to consider loan modifications. The previous administration failed in averting further foreclosures because it relied on voluntary loan modification efforts, which either did not happen or did not modify anything significantly.

According to the Congressional Budget Office, over one million families would be saved from foreclosures if judges had the power to order loan restructurings.

Major groups in the financial services industry, such as the Mortgage Bankers Association, have expressed opposition to the proposal. John Courson, chief of the MBA, wrote to Housing Secretary Shaun Donovan and Treasury Secretary Tim Geithner and told them that non-judicial measures of preventing foreclosures should first be exhausted before judicial options are considered. Others argued that judicial measures would force mortgage lenders to impose higher rates to cover the increased risk.

Nonetheless, if judicial participation in averting foreclosures is approved, lobbyists for the financial industry demand that troubled borrowers should first seek a loan restructuring before declaring bankruptcy and that this particular provision should only apply to subprime mortgages. They also demand that the difference between the loan balance and current market value is deferred and not forgiven.